Overpayment (to the supplier) occurs when you pay your supplier more than what you owe. This article will guide you about how you can account for any overpayment to the supplier, keep track of them, perform proper accounting and in the end, how to reconcile them in Xero.
Moreover, I’ll also show you how you can update any overpayments to the supplier in case you receive a refund from them or if you ask them to adjust your overpayment on your next invoice.
Luckily, Xero allows us the flexibility of dealing these kinds of different scenarios.
Please note that this article only deals with the XERO OVERPAYMENT TO SUPPLIER and NOT the overpayment received from the customer. In case you want to know how to deal with overpayment from the supplier, please read this article: How To Deal With Xero Overpayment From Customer.
Xero Overpayment To Supplier
There can be multiple reasons you overpay your suppliers. The most frequent and likely is due to a mistake.
A robust accounting system needs to be in place just to avoid these kinds of situations otherwise, in the long run, this could have a damaging effect on your overall cash flow position.
Small and Medium-size businesses thrive on liquid cash and if they frequently get stuck due to overpayments made to their suppliers, in turn, this could hold some serious implications for the overall business health.
Tied up cash means fewer funds to meet day to day expenses and even worse would be the situation when you’re not able to keep track of such overpayments. Or even if you are, then the system is not so simple and intuitive that you have to utilize precious man hours just to keep track and maintain a proper accounting of such overpayments.
Fortunately for us, Xero helps us maintain the proper accounting of such overpayments so that when you draft your accounts, the numbers match up perfectly.
So here’s how you can deal with Overpayments to Supplier in Xero.
Record Xero Overpayment To Supplier
Recording Xero Overpayment to Supplier is quite simple. In fact, it’s not different than what you normally do to record any payment made to the supplier within Xero. You can either record it directly from the bills section or from the Bank Feeds screen when the payment to the supplier shows up in your bank feeds. Follow the below steps to account for overpayment using both methods.
From Bills Section
- Go to the bills section from Accounts ? Purchases.
- Open up the respective bill which you overpaid. In our case, it is INV-0001 from Capital Cab Co.
- Let’s assume we overpaid by $50. So the total amount we paid is ($100 + $50 = $150.00). Go right beneath the bill in Make a payment section and enter the amount, date and the bank account in the Amount Paid, Date Paid and Paid From fields respectively and click the Add Payment button.
- Xero, realizing that the bill has been overpaid will display a pop-up window asking you to enter the description and the Region (in case you track your invoices). The description field is mandatory. So enter the description of this overpayment and click OK. We will ignore Tracking for now.
- You can now see the overpayment in the Awaiting Payment section of the invoices with the overpayment recorded as a “(Negative)” figure under the Due column.
From Bank Feeds Section
- Once the payment to the supplier shows up in your bank feeds, go to that particular payment and click “Find & Match” link.
- Search for the bill which you overpaid from the search field. Select the bill by check marking the box beside it.
- You will notice Xero displaying a notification of by how much total is out. The difference is the overpayment.
- Click the New Transaction dropbox and then select “Spend Money”
- Select “Overpayment” from the Spent As drop-down field.
- As soon as you select Overpayment, all the required information will update automatically. All you need to do is click Save Transaction button and then the Reconcile button. You overpayment is now recorded.
Accounting Entries For Xero Overpayment From Customer
Xero records the overpayments to the supplier as:
Accounts Payable Debit
Bank Account Credit
You can confirm this from the Xero’s Journal Entry Report
Also Read: Xero and A2X Item Code Length Issue
Dealing With Overpayment to Supplier in Xero
Once the overpayment to the supplier is recorded it’s time now to take it to the logical conclusion. As said above, there are two ways of doing it. Either allocate the overpayment to a new (or an existing) bill or receive a refund from the supplier. Let’s look at both scenarios one by one:
Allocate Xero Overpayment To Another Bill
Should you decide to allocate overpayment to another bill, here are the steps to do this:
- Create a new bill for the same supplier to whom you overpaid and fill relevant details in it. I won’t go into the details of how the bill is created.
- As soon as you save it a pop-up window shows up stating that there are certain overpayments that you from the supplier and if you want to allocate it to the current bill.
- If you want to allocate the overpayment to the invoice later or missed the notification for some reason, then don’t worry. You can open up the same notification by clicking “Credit This bill” link present at the lower part of the invoice.
- Click “Credit This Bill” link and it will take you to a new page where you can enter the amount from the total overpayment that you want to credit in “Amount To Credit” field.
- Click “Allocate Credit” button to save the allocation.
Accounting Entries for Allocation of Overpayment to an Invoice
When you allocate overpayment to a bill, the accounting impact of this activity will be:
When Invoice is Created
Accounts Payable Credit (for the new bill)
When Overpayment is Allocated
Accounts Payable Debit (To reduce accounts payable on the new bill)
Accounts Payable Credit (To neutralize accounts payable credit for overpayment for old bill)
Note that the crediting the accounts payables won’t double this account. The entry will just balance and nullify the debit of Accounts Payables that occurred when we accounted for the overpayment in the above step.
Receive Refund From The Supplier
Instead of creating a new invoice, should you decide to receive a refund, the process is even simpler than allocating it to the new bill. All you have to do is:
- Click the particular overpayment in the Bills section.
- Right beneath the overpayment window, you can enter information pertaining to the refund in the “Receive a Cash Refund” section.
- Enter Amount, Date on which the refund was paid and the bank account in which the refund was received in the Amount, Date and Paid To fields respectively and click the Add Refund button.
Accounting Entries for Refund of Overpayment
This is quite obvious. The accounting entry would be:
Bank Account Debit
Accounts Payables Credit
How to Reconcile Overpayments In Xero?
If you create an overpayment from the Bank Feeds section directly as we discussed above, then there’s no need to reconcile the overpayment as it will reconcile right away.
However, if you created the overpayment from the Bills section, then you can reconcile it by:
- Accessing the “Account Transactions” tab in the Bank Accounts window.
- Find and open up that particular transaction. Note that the overpayment won’t show up separately but it will show up as part of the larger sum that we receive from the customer.
- After opening the transaction, select Options and then “Mark As Reconciled” to reconcile your overpayment.
Also Read: How To Prepare And File Xero 1099 MISC Form
How To Reconcile Refund Of Overpayment?
Instead of allocating credit to the invoice, you receive a refund from the supplier, in that case, you can reconcile the transaction directly from your bank feeds (assuming that your bank feeds are working fine).
In case you don’t have bank feeds activated, you can manually reconcile the refund by accessing the Account Transactions tab, selecting your transaction and then choosing Mark As Reconciled option. Just like we discussed in the above section (How To Reconcile Overpayments in Xero).
Note that in case of a refund, the refund amount, unlike the allocation, will show up separately in the Accounts Transaction window so finding it won’t be difficult.
So that’s it for now. I hope this article helps. Since there can be many ways of completing a single task in Xero, it’s quite possible that I may have unknowingly skipped any angle of treating Xero Overpayment to Supplier. If that’s the case then I’d appreciate if you point it out in the comments section below. I’ll try my best to address it.
Good bye for now.